What the new housing bill means to you

Though triggered by the crisis in the mortgage market, the new legislation goes well beyond helping those facing imminent foreclosure. The Housing and Economic Recovery Act of 2008 contains a number of measures meant to lend assistance to current and would-be homeowners and, in turn, give a boost to the U.S. housing market.

These provisions are designed to assist first-time homebuyers, existing homeowners with low-mortgage balances and retirees looking to tap their home equity as an income source. For some, there's a downside. This category includes second-home owners who had hoped to escape capital gains tax on the sale of a vacation or rental property.

Whether you stand to gain or lose, by knowing the specifics, you can maximize the benefits or minimize the costs. Here's a rundown on key provisions within the Housing and Recovery Act that affect current or would-be homeowners.

Standard deduction for property taxes: Homeowners who claim the standard deduction on their federal tax returns rather than itemize deductions will be eligible for a higher standard deduction as an offset to state and local property taxes. This measure will benefit homeowners with a low mortgage balance or no mortgage at all.

For many taxpayers, the home mortgage interest deduction is the main reason they bother to itemize at all. Once your mortgage falls below a certain level, your annual interest costs are not enough to make it worth itemizing. And once you stop itemizing, you can no longer deduct the cost of state or local property taxes.

Under the new housing act, a single individual will be able to deduct up to $500 for property taxes paid; for married couples, the limit is $1,000. For qualifying taxpayers, the total standard deduction for an individual will be $5,950 and for a married couple it will be $11,900.

This addition to the standard deduction is scheduled to be in place only for 2008, but don't be surprised if it is extended as it is likely to prove quite popular.

First-time homebuyer credit: Only Congress could create a loan program and call it a tax credit. But that's exactly what it has done with this measure meant to boost the real estate market.

Under this provision, first-time homebuyers will be eligible for a refundable tax credit of up to $7,500 for couples and singles and $3,750 for married individuals filing separately. The credit is effective for a limited period. Qualifying home purchase must take place between April 9 of this year and July 1, 2009. Eligibility begins to phase out at adjusted gross income of $75,000 for individuals and $150,000 for married couples.

The catch is that this so-called tax credit really is an interest-free loan. Taxpayers who utilize the credit will be required to repay it in equal installments during the course of 15 years, beginning two years after the purchase. Even with that catch, however, it's a good deal for those who qualify. Zero percent for 15 years beats 6 percent or more paid on a mortgage loan.

A person is considered a first-time buyer if he or she did not own a residence in the three-year period before the purchase.

Reverse mortgage changes: The housing act will make it easier and less expensive for retirees in need of an income boost to tap their home equity. First, the legislation places a cap on the fees lenders can charge on a reverse mortgage. I'm sure some lenders are unhappy about the cap, but in the long run they may come out ahead. High closing costs are a key reason many seniors shy away from reverse mortgages. A limit on these costs may actually lead to more reverse mortgages, meaning more business for the lenders.

The housing act places a 2 percent origination fee limit on the first $200,000 borrowed and a 1 percent limit on any amount above that up to an overall limit of $6,000, with that amount adjustable for inflation.

In addition to the fee cap, the act also raised the amount that a homeowner can borrow with a reverse mortgage. Currently, the borrowing limit varies by county across the country. The new law sets a $417,500 borrowing limit nationally and allows for higher limits of up to $625,000 in high housing-cost areas.

A reverse mortgage allows homeowners 62 or older to borrow against their home equity to cover living expenses with no payments as long as they continue to own the home. The loan is repaid when the owners die, sell or move to another home. Any money left over after the loan is paid is turned over to the homeowner or the homeowner's estate.

Some retirees have been the target of schemes urging them to take out a reverse mortgage and then use the proceeds to buy another financial product. The new law bars reverse mortgage lenders from requiring borrowers to buy any financial products other than title or homeowners' insurance as a condition of receiving the loan.

Second-home capital gains: Looking to pay for the tax benefits cited above, Congress closed a loophole that allowed the owners of second homes to avoid capital gains taxes with a little bit of planning.

Under current law, married homeowners can exclude up to a $500,000 gain from taxation when they sell their home if the property has been their primary residence for two out of the previous five years. For a single person, the maximum exclusion amount is $250,000.

Tax-savvy owners of vacation homes or rental properties utilized this provision by selling their primary residence, capturing a tax-free gain, and then moving into the second residence and then selling it after two years, again free of taxation.

In the ideal scenario, a married couple could sell two homes within a short period and capture up $1 million in gains with no federal taxes due.

The housing act eliminates this opportunity by eliminating the capital gains exclusion for the portion of gain that came while the home served as a vacation or rental property. It maintains the tax benefit for any gain achieved during the period when the property served as a principal residence.

The new law assumes the gain is achieved at any even rate during the ownership period.

For instance, assume a homeowner sells a residence after 10 years of ownership. During those 10 years, the home was used as a vacation property for eight years and a primary residence for two years.

If the homeowner realized a $100,000 gain at the time of sale, then $80,000 of the gain would be subject to capital gains tax and the remaining $20,000 would qualify for the exclusion.

For vacation homeowners who had been looking to capture a tax-free gain, there is good news. The new law eliminating the tax-free sales opportunity does not take effect until Jan. 1. Move into your vacation home before the end of the year, and you will still be able to take advantage of the old law.

For some, it might be time to start packing.

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